Basel capital rules fall short, risky: Blackrock's Hildebrand

October 15, 2013|Reuters

MEXICO CITY (Reuters) - Policymakers have so far failed to create strong enough capital requirements for banks, which coupled with easy money policies, may sow the seeds of the next financial crisis, a BlackRock Inc. executive said on Tuesday.

New Basel III rules, which require banks to rely more on equity than debt for funding, have missed the mark, Blackrock Vice Chairman Philipp Hildebrand said at a central banking conference in Mexico City.

"Sadly, I have become convinced in the last couple of years that we collectively fell short on Basel III," said the former Swiss National Bank Chairman.

Those rules, combined with lose monetary policy that has distorted asset prices, put the banking system at risk for another crisis, as central banks have flooded markets with cash to lower interest rates and boost sagging growth.

"It is not difficult to imagine a worst-case scenario where central banks are given responsibility for half-baked and incomplete macroprudential policies, which they will not be able to carry out effectively," Hildebrand said.

"As a result, they will at best partially achieve their objectives or at worst fail altogether, with the consequence of another boom-bust credit cycle occurring."

He sees "a risk that unconventional monetary policy cannot be removed in time," allowing extensive distortions to build up in financial markets and spur another crisis.

"Ultimately what I am concerned about is a race against time," Hildebrand said.

The Basel III accord is the world's main regulatory response to the 2007-09 financial crisis that sent undercapitalized banks running to governments for help to stay afloat.

The accord, which is to be phased in through 2019, will require banks to maintain top-quality capital equivalent to 7 percent of their risk-bearing assets, about three times what prior rules required them to hold, to withstand losses better.